Implementing a defensive equity strategy

Using a defensive strategy in the Canadian equity market remains a challenge for many institutional investors, given the limited breadth of investable options, according to a study.

The Russell Investments Canada study says that few investment providers have actively managed products that are labeled as low volatility or defensive, and while other providers maintain that their products are defensively tilted, the portfolio management team may not consistently look at defensive factors as part of their investment process.

As a result, in Canada, these investors may struggle with a lack of options to implement a defensive strategy despite the belief that it would better align their investment portfolio with their objectives.

The study suggests a framework for Canadian institutions to identify and implement various defensive equity strategies:

first, adopt a set of metrics to identify the extent to which current investment styles exhibit defensive characteristics;

second, apply this new lens to the Canadian equity market to identify which stocks may be considered defensive; and

finally, choose a vehicle and determine a strategy for defensive investing.

The report concludes by suggesting that Canadian institutional investors that are truly interested in de-risking their portfolios and taking on a more defensive posture should shift their focus from evaluating managers relative to their benchmarks, to adopting measures that better align with the objectives of a lower-risk portfolio overall.